Vanguard REIT ETF (VNQ)
Owning traditional stock funds is an important component of an index growth strategy. However, it is just as important to include unconventional or alternative asset classes as well. This approach increases diversification, enhances portfolio yield, and can increase returns through strategic positioning.
Publicly traded real estate investment trusts provide direct access to the real property market with liquidity and attractive dividend streams. One excellent way to invest in a basket of these REITs is through VNQ.
This ETF invests in over 140 REITs spread across retail, residential, health care, office, and other specialty sectors. Top companies include well-known names such as Simon Property Group (SPG) and Public Storage Inc (PSA).
VNQ has an effective yield of 3.39% and dividends are paid quarterly to shareholders. In addition, this $28 billion fund only charges a 0.10% expense ratio annually.
Low cost, high yield, and favorable diversification are just some of the reasons that make this ETF an important holding to complement your wealth accumulation efforts.
iShares Core Growth Allocation ETF (AOR)
AOR takes a somewhat different tact by selecting an underlying mix of stocks and bonds through other diversified ETFs. This ETF is perfect for investors that may have smaller accounts, where trading fees would eat into profits for multiple positions. It can also be useful for those that are more concerned about risk and want a balanced index at the core of their portfolio.
As the name implies, AOR is focused on growth through a 60% weighting in domestic and international stocks. In addition, it complements that approach with 40% of the portfolio dedicated to high quality fixed-income to smooth out volatility.
This global and sensible approach helps mitigate the risks of an all stock portfolio through a low-cost index. AOR charges an expense ratio of 0.24 percent and can be used as a central holding or as a building block from which to build off of with more strategic positions.
Final Note: Fixed-Income
These ETFs can be used as tools to access a specific segment of the market rather than trying to pick individual stocks or buy high-fee mutual funds. However, they are always susceptible to the whims of price volatility, which is why I recommend pairing them with a stop loss or sell discipline. This will allow you to participate in the upside, while reducing your downside risk.
I think it’s worth noting the lack of attention towards fixed-income was an intentional omission. In my opinion, there are overwhelming risks to a broad-based index bond fund such as the iShares U.S. Aggregate Bond ETF (AGG). These indexes are often tied too closely to Treasury and investment grade bonds that are highly susceptible to interest rate swings.
In addition, they offer low income yields and poor performance versus several actively managed equivalents. The ability to control credit, duration, sector, and security selection is a huge advantage in the fixed-income world because of the wide dispersion in risk dynamics.
Always remember, the most important thing is to have a game plan and implement it decisively in an effort to produce superior investment results.
This article is brought to you courtesy of David Fabian from FMD Capital Management.